Real estate investment is lucrative and is one of the most profitable ways of making a long-term income. Because of this, it can be risky if you do not know what you are getting into.

Every real estate transaction starts with a contract, an agreement between two parties where they both benefit and no one is at a loss which is why it is very important that you have a basic understanding of real estate contracts.

Real estate investment is legally binding, so you must know about sales and purchase agreements (SPA). The importance of understanding real estate contracts, especially for first-time buyers, cannot be overemphasized. They outline the terms and conditions of property transactions while protecting the rights of both parties, ensuring a smooth and legal process.

The common fears and misconceptions about real estate contracts are usually centered around the fear of the other party backing out. However, the legality behind real estate contracts makes it hard for the other party to back out, in that you have the backing of the court and can take actions against such party if need be.

In this article, you will learn more about what a real estate contract is all about, the types, and all you need to know to help you when you want to buy or sell a home.

What is a Real Estate Contract?

A real estate contract is a legally binding agreement between two parties, the buyer and the seller, stating the terms and conditions of the transaction, whether it is for rent, purchase, or sale, protecting the rights of both parties while also allowing for a smooth process.

A real estate contract will contain important information and specific details of the transaction. These include:

• The price of the purchase as agreed upon by both parties.
• The initial deposit is to be made as a commitment to the purchase by the buyer.
• The specific closing date on which the transaction is to be completed
• The conditions to be met before the sale can proceed
• The condition of the property at the time of sale

Key Functions of a Real Estate Contract

The real estate contract, as earlier said is a legally binding document. It states specifically the terms and conditions of the transaction, whether purchase, sale, or lease. When it is properly enforced in a court of law, it allows both parties to seek legal remedies if the other party fails to uphold the terms of their obligation. This gives protection to the interests of both parties and makes sure that their responsibilities are defined.

Types of Real Estate Contracts

There are different types of real estate contracts and they are based on property transactions, ownership, and purposes. They are:

• Purchase Agreement. Also known as a real estate purchase contract is a sale contract between the buyer and seller of a real estate property. This document entails the property transactions with party identification, sale conditions, purchase price, financial details, and property disclosures.
• Lease Agreement. This legal real estate document is between a landlord and the tenant. It outlines the timeline of the lease, the agreements, and termination conditions and responsibilities.
• Option to Purchase Agreement. This is also called a rental agreement. This type of real estate contract is between the landlord and the tenant for a short period or property rent. This agreement allows both parties have  a mutual agreement, outlining the use of the property or rent, the duration, amount and liabilities.
• Land Contracts/Contracts for Deed. this type of real estate contract is one in which the buyer pays the seller in installments. This payment procedure does not involve a bank or a lender. The contract include the payment terms, responsibilities, property disclosure, cancellation clauses and the identification of both parties.
  
  

Key Components of a Real Estate Contract

• 1. Purchase Price and Terms: this consists of the sale price and financing details of the contract.
• 2. Property Description: This entails the full street address of the property, and a description of the property’s boundaries, usually found in the deed. Then the inclusion and exclusion of items such as appliances, fixtures, and landscaping.
• 3. Earnest Money Deposit: this is the agreed purchasing price of the buyer, the deposit to show commitment to the purchase, financing, and how the purchase price will be made, either through cash or mortgage, while also noting refundable or non-refundable scenarios.      
• 4. Contingencies and Conditions: This notes the: financial contingencies, allowing the buyer to back out if they cannot secure funding; inspection contingency allows the buyer to have the property inspected before purchase, allowing the buyer to back out or lower the price if any issue is found; appraisal contingencies allows the buyer to back out if the property appraises for less than the purchasing price; title contingency allows the buyer to back out if they are unable to sell their current home.
• 5. Closing Date and Possession: This entails the date when the property ownership is transferred from the seller to the buyer and the breakdown of the cost related to the transaction such as attorney fees, recording feels, and title insurance.
• Others include: disclosures and warranties, default and remedies, signatures and execution.
  
  

Common Contingencies in Real Estate Contracts

• Financing Contingency
• Inspection Contingency
• Appraisal Contingency
• Title Contingency
• Home Sale Contingency

How to Read and Understand a Real Estate Contract

• Step 1: Familiarize yourself with the fundamental terms first
• Step 2: Understand the concept of contingencies and exit clauses
• Step 3: Be mindful of deadlines and time limits
• Step 4: Clarify any unclear terms and conditions
• Step 5: Consult with legal and professional experts
• Step 6: Avoid signing unless you fully understand

The Real Estate Contract Process: Step by Step

• Proposal and consent 
• Drafting and examining the contract 
• Escrow and initial deposit 
• Contingency phase and inspections 
• Final inspection and closing 
• Executing and recording the deed

Common Pitfalls to Avoid in Real Estate Contracts

• Overlooking or forgetting  contingencies
• Underestimating expenses and getting poor financing
• Ignoring deadlines and timelines which may lead to contract termination
• Failing to verify property information
• Not understanding earnest money rules
• Skipping and not adhering to legal advice
  
  

Expert Tips for First-Time Buyers

• Always work with a trusted real estate agent or attorney
• Ask questions and get clarifications on areas in which you do not understand
• Focus on contingencies and escape clauses, and familiarize yourself with them
• Cross-check all terms and conditions
• Understand your rights and obligations before signing the contract

Conclusion

The energy you put into understanding real estate investment as a beginner should be put into understanding the contract. One thing about signing a real estate contract as a beginner is that you can easily fall into the hands of a fraudster or someone who also does not understand the basics.

Hence, before you sign a real estate contract either as a buyer or a seller, you do your due diligence of the property in which you are hoping to buy, sell or rent. This will allow you to avoid any loss and loopholes that may come up as a result. You need to also have excellent negotiatiing skills, be able to convince your buyer or sleller in a way that will satisfy both parties.

As a first-time buyer, you need to seek professional guidance before you proceed with signing a real estate contract. There are real estate lawyers who specialize mainly in real estate and are quite knowledgeable and in the best position to help you. Ask questions and ensure you understand the clauses of the contract.